Less than two weeks after announcing it would be acquiring the 45% stake that Vodafone (NASDAQ:VOD) holds in Verizon Wireless and more than doubling its debt in the process, Verizon Communications (NYSE:VZ) tested the corporate bond market's appetite for yield with a massive bond offering. On Wednesday, Verizon sold $49 billion of notes in an eight-part offering, shattering the $17 billion record that Apple (NASDAQ:AAPL) held for the largest ever corporate bond sale. Here is a breakdown of the pertinent details from the blockbuster bond sale starting with the CUSIPs, maturities, coupons, and sizes:
Verizon Communications Inc.
Floating Rate, 3-month LIBOR plus 1.53%, reset quarterly
Floating Rate, 3-month LIBOR plus 1.75%, reset quarterly
With the exception of the "Special Mandatory Redemption" that is outlined below, the two floating-rate issues are non-callable. The six fixed-rate issues, however, in addition to being subject to the "Special Mandatory Redemption," also have make whole calls. The make whole amounts are at the greater of par or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the date of redemption on a semiannual basis at the applicable Treasury rate plus the following number of basis points:
Make Whole Call at Treasury Rate Plus
30 basis points
35 basis points
35 basis points
40 basis points
40 basis points
45 basis points
The "Special Mandatory Redemption" states that if the closing of the acquisition of Vodafone's stake in Verizon Wireless has not occurred on or before September 2, 2014, or the acquisition agreement is terminated on or before September 2, 2014, Verizon must redeem all eight series of notes at 101 cents-on-the-dollar plus accrued and unpaid interest. Additionally, the provisions of the "Special Mandatory Redemption" can only be waived or modified if the holders of at least 90% of the principal amount of the notes outstanding for each series of notes in question provide written consent.
As I noted in "Verizon Bonds Plunge Following Vodafone Deal," in the days immediately following the $130 billion deal announcement, Verizon's debt was downgraded by all three major rating agencies and experienced notable spread widening (a price drop in excess of what was warranted by changes in benchmark Treasury rates). The spread widening continued into Wednesday morning, the day of the bond sale. But once the brand new CUSIPs hit the secondary market, Verizon's bond spreads reversed, sending the newest issues soaring in price and dropping in yield. The 2016 fixed-rate notes, for example, had a closing offer of 102.15 at the end of its first day of trading. That equates to a 1.759% yield-to-worst or nearly 75 basis points lower than it was issued earlier in the day. The 2018 fixed-rate notes dropped more than 67 basis points on the first day of trading. The 2020 and 2023 fixed-rate notes dropped roughly 56 and 36 basis points respectively on Wednesday. And the two longest-dated series of notes, maturing in 2033 and 2043, closed the day with offers of 105.775 and 106.245. What does that mean in yield terms? It means that even the longest-dated series of notes dropped roughly 50 and 45 basis points respectively on the first day of trading. The opening day performance of Verizon's newest issues can only be described as outstanding.
If you were hoping to get your hands on one of Verizon's newest bonds but are frustrated by how quickly they jumped in price, you might consider looking at another telecom giant's debt, that belonging to AT&T (NYSE:T). In the wake of Verizon's deal announcement, the AT&T bonds that I follow experienced some spread widening of their own. My take on why this occurred is that portfolio managers were either freeing up some space on their books to buy Verizon bonds (hence selling other bonds within the same sector to free up cash), or investors were unjustly punishing AT&T bonds in an effort to keep other telecom debt trading at certain levels relative to Verizon's bonds. Either way, I viewed it as an opportunity to pick up some longer-dated AT&T (CUSIP 00206RBA9) debt and did so late last week at a yield-to-maturity of just under 5.80%.
Disclosure: I am long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also long AT&T's CUSIP 00206RBA9.